Lloyd's, Stanford Trial Begins on Insurance Claim

By Laurel Brubaker Calkins and Andrew M. Harris -
Aug 24, 2010

Lloyd’s of London underwriters are
attempting to convince a U.S. judge that financier R. Allen Stanford conspired to steal money so they can avoid paying
attorneys to defend him on criminal fraud charges.

U.S. District Judge Nancy Atlas today began hearing
evidence in federal court in Houston in a three-day civil trial
conducted without a jury in Stanford’s lawsuit against the
London-based insurers.

Stanford, charged with leading a $7 billion fraud scheme,
and three former colleagues who are now co-defendants in his
criminal case, claim they can’t afford defense lawyers without
access to $100 million in liability insurance Lloyd’s sold to
Stanford Financial Group. Lloyd’s has denied their claim, citing
a guilty plea by Stanford’s former finance chief and reports by
forensic accountants who probed Stanford’s books.

“Basically, the underwriters sought to convict their own
insureds,” Lee Shidlofsky, a lawyer for Stanford’s colleagues,
said in an e-mail this year. “And by doing so, underwriters
undermined the very essence of the protections afforded by a
directors’ and officers’ policy.”

Stanford and his co-defendants are charged with 21 criminal
counts of deceiving investors about the security and oversight
of $7 billion of certificates of deposit issued by Antigua-based
Stanford International Bank Ltd.

Criminal Trial

In January, Stanford is scheduled to be tried before a
federal court jury in Houston. The other defendants will be
tried together at a later time.

During today’s proceedings, Dan Cogdell, a lawyer for co-
defendant Laura Pendergest-Holt, said his client has reached a
settlement with Lloyd’s. Pendergest-Holt was Stanford’s chief
investment officer.

Outside the courtroom, Cogdell declined to disclose the
terms of the accord.

In December 2008, Stanford International Bank’s financial
statements showed it had $8.1 billion in assets, Lloyd’s lawyer
Barry Chasnoff told Atlas today. When the SEC seized the
operation a few weeks later, the money was largely missing.

“In spite of herculean efforts, the receiver has recovered
less than $1 billion of those assets,” Chasnoff said. “This
case is the story of what happened to those billions.”

“The evidence will show there wasn’t a Ponzi scheme,
wasn’t any type of fraud committed and there wasn’t even any
misrepresentation,” Stanford’s lawyer, Robert S. Bennett, told
Atlas in his opening remarks today.

CD Redemptions

Stanford’s bank paid out more than $2 billion in CD
redemptions in the last quarter of 2008, as investors were
scrambling for funds during the global financial meltdown,
Bennett said.

“Until the government came in and took over this bank, no
one lost any money,” he said.

Any wrongdoing, Bennett said, was the fault of former
Stanford Chief Financial Officer James M. Davis and Pendergest-
Holt.

“My client was completely out of the loop,” he said.

A former Stanford employee, among the first witnesses to
testify in the trial, said neither brokers nor customers were
told the true nature of the Stanford CD investment portfolio.

Mark Tidwell, a financial adviser who left the firm in
December 2007, said he didn’t know that the majority of the
bank’s investments weren’t supervised by a team of elite money
managers or that the bank carried large illiquid real estate
investments and unsecured loans to Stanford on its books.

“We were told that within three to five days, the bank
could be converted essentially into cash,” Tidwell said.

Money Laundering

Lloyd’s lawyers claim that what transpired fits the
underwriters’ description of money laundering, defined in the
policies as any attempt or conspiracy to misappropriate someone
else’s money, a definition which is broader than that of the
corresponding federal criminal statute.

“The facts fit money laundering whether he used that term
or not,” Chasnoff said in court last year, referring to Davis’s
plea agreement.

Chasnoff said Lloyd’s policies are written so that any
allegation of money laundering is enough to deny coverage of
defense costs.

While prosecutors haven’t charged Stanford or the other
defendants with money laundering, the underwriters say Stanford
and the other executives violated their version of it, voiding
coverage.

Atlas asked the Lloyd’s lawyer where the unusual definition
of money laundering had come from.

Earlier Policies

Chasnoff replied the clause had been in Stanford’s three
previous directors’ and officers’ policies and was originally
brought to the contract negotiation at Lloyd’s by Stanford’s
insurance broker.

“All I can say is, it’s turning out not to be such a
bargain,” Atlas remarked. She asked Lloyd’s to present a
witness on the origin of the definition. Chasnoff said the
underwriters hadn’t planned to offer one.

All the defendants had told Atlas they’re destitute. Their
assets were seized in February 2009 after the U.S. Securities
and Exchange Commission sued them for allegedly paying returns
to early investors by taking funds from later investors.

When Lloyd’s denied their coverage in November, the former
executives sued and won a temporary court order requiring the
underwriters to pay for the defense lawyers until a judge can
determine validity of the coverage.

Lloyd’s has already paid more than $15 million to attorneys
representing the four criminal defendants and several lower-
ranking employees also under investigation by prosecutors and
securities regulators, according to court papers.

Evidence Preview

The civil proceeding in Atlas’s courtroom will provide a
preview of evidence and testimony that prosecutors may seek to
use in the criminal trials.

The biggest difference is Lloyd’s underwriters need only
convince Atlas that Stanford is more likely to be guilty than
not guilty, a lesser standard of proof than the beyond-a-
reasonable-doubt certainty required in a criminal trial jury.

Neither Stanford nor his co-defendants are expected to
testify because any statements could be used against them in the
criminal case.

Atlas said today that she would defer a ruling on whether
she’ll infer that the defendants are guilty if they assert their
Fifth Amendment right not to testify, as she is allowed to do
under civil law.

Lloyd’s asked Atlas to make that inference.

Alleged Misconduct

“This is not the criminal trial,” Atlas told lawyers
today. She said the underwriters have established in court
filings what Stanford and the other executives knew of the
misconduct alleged by Lloyd’s and when they knew it.

Stanford, who has been in jail without bond since he was
indicted in June 2009, will attend each day’s court session in
shackles. Atlas ruled he could have one hand free to ease
handling of documents and communication with his lawyers.

The case is Laura Pendergest-Holt v. Certain Underwriters
at Lloyd’s of London, 4:09-cv-03712, U.S. District Court,
Southern District of Texas (Houston).

The criminal case is U.S. v. Stanford, 09-cr-00342, U.S.
District Court, Southern District of Texas (Houston). The SEC
case is Securities and Exchange Commission v. Stanford
International Bank, 09-cv-00298, U.S. District Court, Northern
District of Texas (Dallas).